Fitch assigns Aeroflot ruble bonds expected rating of 'BB-(EXP)'
MOSCOW/LONDON. March 27 (Interfax) - International ratings agency Fitch Ratings has assigned OJSC Aeroflot - Russian Airlines' proposed 5-billion-ruble notes an expected local currency senior unsecured rating of 'BB-(EXP)' and an expected National senior unsecured rating of 'A+(rus)(EXP)', the agency said in a press release.
In accordance with Fitch's Parent and Subsidiary Rating Linkage methodology, Aeroflot's Long-term IDR continues to benefit from parental support via a one-notch uplift to its standalone profile assessed by Fitch at 'B+'. The agency views the strategic and operational ties between the parent (Russian Federation; 'BBB'/Stable) and the company as relatively strong. This is supported, among other things, by its majority state ownership (51.2% direct stake in addition to a 9.5% indirect stake), import duty exemptions for the purchase of certain types of aircraft and the company's importance in the development of the country's air transportation sector, the press release said.
At the same time, Fitch acknowledges the potential negative implications of state links, for example, a potential aggressive consolidation and/or acquisition plans at the expense of Aeroflot's credit profile, but highlights that the Rostechnologii transaction, whilst proposed by the state, was to some extent at Aeroflot's discretion and following due diligence process, Fitch said.
The downgrade on March 21, 2013 reflected Fitch's view that Aeroflot's standalone credit metrics are no longer commensurate with the 'BB' rating category. Although Fitch forecasts improvement in the company's financial profile over 2013-2016, its leverage metrics remain high compared with its 'BB' rated peers, the press release said.
Fitch forecasts Aeroflot's FFO adjusted leverage to have decreased to below 6x in 2012 and expects gradual de-leveraging to below 5x by 2016, despite the company's ambitious fleet expansion and renewal program. While we acknowledge the benefits of a newer, more efficient fleet, the funding of the capex program will require additional debt burden putting pressure on the company's financials. The agency anticipates FFO fixed charge cover to increase to around 2x over the forecast period. Based on these financial ratios, the company is well placed compared with its 'B' rated airline peers, the press release said.
Despite some erosion of its profitability in 2011-2012 due to high fuel prices and consolidation of the financially weaker Rostechnologii assets, Fitch expects Aeroflot's profitability to remain solid compared with its European and some US counterparts. While yield and passenger revenue per available seat-kilometer (PRASK) are largely in line with those of its rivals, the company's cost ratios (eg cost per available seat-kilometer (CASK)) put it at an advantage to other airlines providing a good foundation for maintaining sound margins, the press release said.
Fitch views Aeroflot's standalone business profile as commensurate with the 'BB' rating category. It is supported by its dominant position as Russia's national flag carrier in a highly fragmented market (37% of the Russian passenger traffic in 2012), relatively diversified route network, strong position at the Sheremetyevo airport hub and ability to capitalize on the strong growth potential of the domestic market. While the yields on the domestic routes fall short of those on the European destinations, Fitch anticipates their increase in the medium term.
Fitch expects Aeroflot to continue dynamic growth given forecast Russian GDP growth, increased mobility of Russian citizens and the integration of the Rostechnologii airline stakes. The consolidation of these assets has enabled Aeroflot to strengthen its dominant position in Russia's airline sector and extend its network and should underpin the implementation of the company's multi-brand strategy in the medium term, the press release said.
Fitch views Aeroflot's liquidity position as satisfactory, with cash of $597 million at end-9M 2012 and committed credit lines of about $500 million (Aeroflot standalone) at end-2012 sufficient to cover its short-term obligations. As at end-9M 2012, short-term debt stood at $784.6 million (including $263.8 million of finance leases). This included bonds totaling c.$400 million due in April 2013. The company has registered an issue of ruble-denominated bonds for about 5 billion rubles (around $167 million), the proceeds of which are likely to be used for refinancing purposes. Fitch expects the company to generate negative free cash flow (after finance lease payments) over 2012-2014.
Future developments that could lead to positive rating actions include: evidence of stronger state support; and improvement of the financial profile (eg FFO adjusted leverage trending towards 4.0x and FFO fixed charge cover above 2.0x on a sustained basis) due to, among other things, material increase in profitability, moderation of investments in the fleet and/or drop in fuel prices.
Future developments that could lead to negative rating action include: further material deterioration of the credit metrics due to, among other things, acquisitions, ambitious fleet expansion and/or high fuel prices (eg FFO adjusted leverage above 5.0x and FFO fixed charge cover below 1.5x on a sustained basis); and weakening of state support, Fitch said.
